Which of the following is consistent with the pure expectations theory of the yield curve? Check all that apply.A downward-sloping yield curve suggests that the market thinks interest rates in the future will be higher than they are today.✓ A downward-sloping yield curve suggests that the market thinks interest rates in the future will be lower than they are today.A flat yield curve suggests that the market thinks interest rates in the future will be the same as they are today.A flat yield curve suggests that the market thinks interest rates in the future will be higher than they are today.Maria would like to invest a certain amount of money for two years and considers investing in a one-year bond that pays 6 percent and a two-yearbond that pays 9 percent. Maria is considering the following investment strategies:Strategy A: In the first year, buy a one-year bond that pays 6 percent. Once that bond matures, buy another one-year bond that paysthe forward rate.Strategy B: In the first year, buy a two-year bond that pays 9 percent annually.If the one-year bond purchased in year two pays 5 percent, Maria will choose Strategy BWhich of the following describes conditions under which Maria would be indifferent between Strategy A and Strategy B?O The rate on the one-year bond purchased in year two pays 10.272 percent.The rate on the one-year bond purchased in year two pays 11.360 percent.The rate on the one-year bond purchased in year two pays 12.085 percent.The rate on the one-year bond purchased in year two pays 13.052 percent.

Yield curve refers to the form of line represented on a graph which reflect the interest rate of…

Answered: loping yield curve suggests that the…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Which of the following statements is CORRECT about the yield curve? A) The yield curve shows the behaviour of interest rate forecasts. B) When short-term rates are lower than long-term rates, there is a downward-sloping yield curve. C) A downward-sloping yield curve shows that investors demand an additional risk premium for lending money over the long term. D) A downward-sloping yield curve indicates that the market expects a future rise in interest rates.
Under the expectations hypothesis, if the yield curve is upward-sloping, the market must expect an increase in short-term interest rates. True/false/uncertain? Why?
If the yield curve is downward sloping, what would the expectations theory suggest about expected future short-term interest rates?
Assuming the pure expectations theory is correct, an upward-sloping yield curve implies:a. Interest rates are expected to increase in the future.b. Longer-term bonds are riskier than short-term bonds.c. Interest rates are expected to decline in the future.
If general consensus is that interest rates are abnormally high and will soon fall, one would expect to observe according to the expectations theory an upward sloping yield curve. a downward sloping yield curve. a flat yield curve. a circular yield curve.
Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the US Treasury yield curve can take. Check all that apply. Downward-sloping yield curve Inverted yield curve Upward-sloping yield curve Identify whether each of the following statements is true or false. StatementS True False If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP = 0.) All else equal, the yield on new bonds issued by a leveraged firm will be less than the yield on the new bonds issued by an unleveraged firm. The yield curve for a BBB-rated corporate bond is expected to be above the US Treasury bond yield curve. Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets.
Which of the following is correct with regards to Theories of Term Structure? When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.
We discussed the expectations theory of the term structure of interest rates. What does it says about the factors that influence the shape (upward, downward or flat) of the yield curve. Why does the yield curve sometimes inverts (become downward sloping) even though most of the time it is upward sloping?
Consider the liquidity premium theory. If a yield curve looks like the one shown here, what is the market predicting about the movement of future short-term interest rates? Distinguish between the flat part of the curve and the part with the increasing slope. Yield to maturity Term to maturity
Which of the following best explains an upward sloping Treasury yield curve? A. Maturity risk is expected to decline in the future B. Long-term interest rates are more volatile than short-term rates C. Inflation risk premiums are higher for longer terms to maturity D. Default risk is higher for longer terms to maturity
Which one of the following statements about the term structure of interest rates is true?a. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates.b. The expectations hypothesis contends that the long-term rate is equal to the anticipated short-term rate.c. The liquidity premium theory indicates that, all else being equal, longer maturities will have lower yields.d. The liquidity preference theory contends that lenders prefer to buy securities at the short end of the yield curve.
22. If the expectations theory of the term structure of interest rates is correct, and if the otherterm structure theories are invalid, and we observe a downward sloping yield curve, which ofthe following is a true statement?a.Investors expect short-term rates to be constant over time.b.Investors expect short-term rates to increase in the future.c.Investors expect short-term rates to decrease in the future.d.It is impossible to say unless we know whether investors require a positive ornegative maturity risk premium.e.The maturity risk premium must be positive 23. Other things held constant, which of the following will not affect the quick ratio? (Assumethat current assets equal current liabilities.)a.Fixed assets are sold for cash.b.Cash is used to purchase inventories.c.Cash is used to pay off accounts payable.d.Accounts receivable are collected.e.Long-term debt is issued to pay off a short-term bank loan.

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